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Kwa Chong Seng
Chairman
Non-Executive Independent Director
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Vincent Chong Sy Feng
Group President & CEO
Executive Director
Dear Shareholders
2022 was a year marked by considerable challenges but also significant opportunities. Even as much of the world recovered from the COVID pandemic, geopolitical stability was shaken by the conflict in Ukraine. Businesses grappled with energy price volatility, higher inflation, supply chain disruptions, global chip shortages and rising interest rates.
In such an environment, while we were cautious because of the short-term market outlook, we continued to take the long view. Ever since we embarked on our journey to transform ST Engineering, the Board and management team have demonstrated our commitment to making measured and sound decisions — reinforced by a willingness to take calculated and calibrated risks — to achieve our strategic long-term objectives.
At Investor Day 2018, we unveiled our plans to seek growth in selected domains while streamlining our portfolio, and at Investor Day 2021, we refreshed our five-year (2022-2026) mid-term targets to place the Group on a clear path forward in a continuously evolving world, post-COVID. Our aim is that by 2026 (using 2020 as the base year), we will have grown our revenue at a CAGR of two to three times global GDP growth rate, which would translate to a Group revenue of more than $11b by the end of the five-year plan, with net profits expected to grow in tandem. By 2026, we expect annual revenue from our Commercial Aerospace segment to exceed $3.5b, and annual revenue of our Smart City business to more than double to $3.5b. In addition, we expect that the annual revenue from our digital business — comprising the Cloud, AI Analytics and Cyber businesses — to triple to more than $500m.
We are confident that our strategy for achieving sustainable growth is on track given our achievements in recent years, especially our resilience against the COVID pandemic. Our results speak for themselves. In 2022, Group revenue was $9.0b while Group EBIT and Group Net Profit were $735m and $535m respectively. Between 2020 (the start of the pandemic) and 2022, Group revenue grew 26%, while our underlying operating performance (excluding government support) at Group EBIT and Group Net Profit levels was three times as strong. This recovery is significant given that more than 40% of our business was directly and negatively impacted by the pandemic. We closed 2022 with total contract value of $13.1b as all business segments maintained good contract win momentum, and a Group order book of $23b, which was 19% higher than the prior year and 50% stronger than when we went into 2020 at the start of COVID-19. Our robust order book, a leading indicator of growth, points to stronger business activities across all our segments. It also reflects a sharper focus on our customers, enabled by a more effective organisation structure put in place two years ago.
Highlights include the completion of the acquisition of TransCore, and major contract wins in all business segments, including international defence business which gained traction in the Middle East. Our Airbus Passenger-to-Freighter (P2F) conversion programme continued to book new orders and improved its gross profit margin as new conversion sites mature. At the same time, we have also divested ourselves of businesses that no longer fit our long-term strategic objectives, such as the U.S. Marine business. These achievements are important milestones towards our 2026 goals.
Stronger Smart Mobility business. We completed the acquisition of TransCore in mid-March 2022 and immediately focused on transitioning the business into the Group. We are pleased to report that, as planned, our investment in TransCore turned cash flow positive at the close of 2022, and we expect this acquisition to be earnings accretive to the Group from its second year.
TransCore’s steadfast focus on customer excellence ensured continuity in project execution and strong contract wins as demonstrated by the significant contracts it secured in late 2022 to modernise the tolling infrastructure in New Jersey. We plan to grow the TransCore business outside of the U.S., bringing its strengths in design and build as well as operations and maintenance of end-to-end tolling solutions, into Southeast Asia, leveraging our strong track record built over the years in providing a strong suite of transportation solutions in these cities.
Beyond TransCore, our Smart Mobility business has been winning contracts for landmark projects around the world. Headlining our wins in 2022 was the contract for the new Kaohsiung MRT Yellow Line in Taiwan, where we will provide turnkey rail services and serve as overall project management and systems integration lead as part of a consortium with Siemens Mobility and Stadler Rail.
These developments bring us closer to becoming a market leader in Smart Mobility and will help us to build up our position in the Smart City space.
Airbus P2F conversion business takes off. According to IATA, 2022 was one of the strongest years for the air cargo industry. Unsurprisingly then, it was a big year for our Airbus P2F conversion business. At the programme level, we also turned gross profit margin positive in the last quarter of 2022, a significant milestone.
We completed our family of Airbus converted freighters solution suite when we redelivered our first freighter based on our A320P2F programme in July 2022. Other platforms within the family — the A330-300P2F, A330-200P2F and A321P2F — were redelivered in 2017, 2018 and 2020 respectively. Conversion slots for our A320/321P2F and A330P2F are fully booked through 2026.
Freighter conversion is our core competency, and we have invested in the Airbus P2F conversion capability and business well before COVID-19 expecting it to be profitable over the long run. While pent-up demand from the COVID pandemic may eventually subside, fundamental demand is still strong as freighter capacity planning by freighter airlines is long-term in nature, riding over multiple economic cycles.
This is also the reason we have increased our conversion capacity across our global network by adding Shanghai and Mobile, Alabama to our conversion sites in San Antonio, Texas; Dresden, and Singapore. To meet strong demand, we are collaborating with Turkish Technic and Ameco as third-party conversion houses to provide conversion services for our A330P2F programme. At the time of writing this letter, we announced our intent to collaborate with Sichuan Haite Hi-Tech for it to carry out conversions for our A321P2F programme.
These developments augur well for our Commercial Aerospace business, which is well on its way to achieving our 2026 target of more than $700m of annual revenue from the freighter conversion business.
Disciplined portfolio management continues. After a thorough review, we divested our U.S. Marine business, following years of challenges and losses in operating the shipbuilding and ship/rig repair businesses despite significant efforts to turn them around. The divestment enabled us to avoid future losses, while enabling management to focus on growth businesses.
In late 2022, we also decided to wind up our Autonomous (AV) Bus unit that was started in late 2015. We still firmly believe that autonomous buses are closer to being commercialised compared to other types of autonomous vehicles. The business needs are evident and the path to reaching the required levels of performance are also better known and more attainable. While we have made considerable technological progress, there are still technical and operational milestones to be reached. As the financial resources needed for this continuing effort are significant, after careful evaluation, we decided to withdraw from further AV bus development.
Hence, future capex needed for this wound-up AV Bus business, and that of the U.S. Marine business will be avoided. In the six years since 2016 when we started our portfolio rationalisation, we have divested or closed 16 businesses including these two. As the operating environment for each line of business evolves, we will continue to prioritise businesses that play to our strengths, are attractive and are scalable. This way, our portfolio will be high-graded and will remain resilient in generating value for shareholders, customers and employees alike.
Innovation culture to sustain technology and engineering core. As a technology, defence and engineering Group, we understand the need to sustain our technology and engineering core and we have committed to invest up to 5% of our annual revenue on R&D, of which up to 75% will be spent on digital technologies.
In addition, we continue to strengthen our engineering talent pool, attracting and recruiting the best in our journey to build a world-class team. For years, we have been driving innovation, establishing strategic collaborations, and sustaining an innovation culture that helps our engineers to expand their competencies as part of their professional development.
We have an integrated framework on how we think about innovation. This framework can take numerous forms and produces an array of outcomes. In providing a failure-tolerant space, our employees and engineers can better experiment, harness their creativity, and redefine boundaries. It is also in these spaces that we can unleash and take advantage of our collective genius.
In line with this, we have numerous innovation awards to recognise our employees and to encourage them to innovate. The Best-of-Best Continuous Improvement Awards seek to showcase the most outstanding improvements to work processes and drive cost efficiencies and excellence in whatever we do. The InnoChamp Awards recognise teams behind products, services, or business ideas that have been successfully launched within the last 12 months, while the In.Vent Awards focus on new venture innovations where teams are assessed on customer desirability, technical viability and business feasibility.
ST Engineering posted a 17% year-on-year (y-o-y) increase in Group revenue to $9.0b from $7.7b. Group EBIT improved 9% y-o-y to $735m from $674m despite a reduction of $203m in government support1. On a base operating performance (BOP) basis, excluding government support, energy inflation impact and TransCore transaction and integration (T&I) expenses, as well as the positive impact of a pension restructuring cost savings, Group EBIT increased by 55% y-o-y to $727m. This result was achieved through cost saving initiatives and business growth.
Group PBT was $597m, down 6% y-o-y from $638m and Group Net Profit was $535m, down 6% y-o-y from $571m, largely due to the virtual absence of government support in 2022. On a BOP basis, Group PBT and Group Net Profit each grew by close to 40%, on the back of cost saving initiatives and business growth.
Commercial Aerospace, Urban Solutions & Satcom and Defence & Public Security accounted for 33%, 20% and 47% of revenue respectively. By geography, customers from Asia, including Singapore accounted for 50% (compared to 58% in 2021), while customers from the U.S. and Europe accounted for 25% and 18% (was 20% and 16% respectively in 2021). The remaining 7% customers were from the rest of the world. By products and services type, Commercial revenue was $6.0b and Defence revenue was $3.0b.
Our performance at the business segment level also showed strength in key areas.
Revenue for Commercial Aerospace segment was $3.0b, up 21% from $2.5b though the aviation industry has yet to recover fully to pre-COVID level. EBIT grew 65% y-o-y to $301m from $182m, despite a $150m reduction in government support y-o-y, due to cost saving initiatives and business recovery.
The aviation industry gained momentum in its recovery from COVID-19 as travel restrictions across the world were further lifted, leading to the reopening of more routes. Increased demand for air passenger and air cargo also spurred new aircraft orders and freighter conversions, signalling confidence in the sustainable growth of air passenger and air freight post-COVID.
Our Aerostructures and Systems business saw several new developments during the year. The manufacturing business recovered steadily as the production rate improved in line with rising demand from OEMs. In addition, as mentioned earlier, the freighter conversion business also continued growing, with strong customer demand. Returning MRO demand was reflected in the healthy utilisation rate of all our facilities, which maintained, on average, an above 80% rate in 2022. Our airframe hangars were operating mostly at near full capacity.
We expect to see further recovery in aviation in 2023, especially in the Asia Pacific region. The reopening of China will also present more opportunities, enabling our local operations to go back to full capacity sooner and help raise the efficiency of our MRO output.
Revenue for Urban Solutions & Satcom segment grew 49% y-o-y to $1.8b from $1.2b, with contribution from TransCore. The segment EBIT was $29m, up 13% y-o-y from $26m despite TransCore T&I expenses, and in spite of Satcom’s weakness resulting from the impact of global chip shortages and its higher investment in product development.
As part of returning to normalcy post-COVID, we saw a resumption of investments by some governments into infrastructure development. This led to more opportunities for large-scale projects, especially in the areas of Smart Mobility, IoT and Smart Security.
Our Mobility Rail business continued to win contracts for landmark projects around the world that underscore our competitive differentiation and demonstrate our ability to move up the value chain. Our AGIL® Smart Street Lighting control solutions continue to gain traction in various parts of the world, reinforcing our credentials in quality solutions that deliver superior lighting performance, reduce energy consumption and ease maintenance regimes.
While our Satcom business saw a gradual pickup in most of its markets, the global chip shortages continued to weigh down this business. Specific components used in our satcom products were still experiencing shortages due to imbalances of chip inventories. Even with mitigation measures to reduce business impact, we expect the shortage in chips on our Satcom business to improve only in 2023. Meanwhile, we have increased our investments in product development to better position our Satcom business towards virtualisation and the cloud as the industry moves towards a new hybrid of satellite and terrestrial Cloud and 5G networks.
Revenue for our Defence & Public Security (DPS) segment grew 6% y-o-y to $4.3b from $4.0b with contribution from all its sub-segments: Digital Systems & Cyber, Defence Aerospace, Land Systems and Marine. The segment EBIT was down 13% y-o-y to $405m from $466m in the absence of $51m government support received in the prior year and a $23m impact from energy inflation. If these factors were excluded, DPS EBIT would be 3% stronger y-o-y.
Geopolitical conflicts have increased the importance of national security and defence, leading many countries to expand their defence budgets. This translates into greater export opportunities for our International Defence business. We have identified opportunities that are compatible with our flagship platforms and solutions, including the Bronco All Terrain Tracked Carrier and its commercial variant, ExtremV that is designed for humanitarian assistance and disaster relief missions. The defence business pipeline has a long gestation period though, and it will take several years before these efforts show results.
One of our multi-year business development efforts did bear fruit in the Middle East. In 2022, we formed a notable defence partnership with Saudi Arabian Military Industries, consistent with our go-to-market approach of tapping on local defence champions to deliver differentiated defence solutions. Concurrently, we also won a set of new defence contracts worth over $300m from a customer in the Middle East.
Meanwhile, the Falaj 3-class Offshore Patrol Vessels project in UAE that we secured in 2021 is tracking well and has progressed to the Critical Design Review phase.
In previous annual reports, we mentioned that, together with Oshkosh Defense, we were bidding to produce the Cold-Weather All-Terrain Vehicle for the U.S. Army. Unfortunately, we were not successful in this bid despite delivering a competitive platform which met all technical and performance requirements. This experience, though, has been a valuable one, and we will learn from this and strive to make better inroads in this market segment.
On our Digital business, we continue to build up our core competencies in operational technology and cybersecurity to help governments and enterprises strengthen their security and protect their critical operating systems and data from evolving and complex threats. Digital business comprising Cloud, AI Analytics and Cyber businesses achieved a revenue of $385m in 2022, or more than doubled the revenue in 2020, on track to well exceed its 2026 target of $500m.
Our business updates and outlook are covered in the Operating Review and Outlook section.
We reduced our unit operating expenses (per unit revenue)2 to 11.7% in 2022 from 12.0% in 2021, and from 12.2% recorded in 2019 before the pandemic. We achieved this because of the Group’s continued structural cost and operational efficiency capture, notwithstanding general inflationary pressure.
Capex in 2022 was about $760m, with a large part spent on supporting our Aviation Asset Management business for which we have near-term plans to securitise and recycle capital. Other portions of the capex went into supporting businesses across the Group, including the construction of new hangars.
Post-TransCore acquisition, our balance sheet remained strong, with Aaa and AA+ ratings by Moody’s and S&P respectively. 2022 operating cash flow decreased compared to 2021 due to higher net working capital to support growth in revenues as business recovery continues.
We issued US$700m in 5-year bonds and US$300m in 10-year bonds in May 2022 to partially term out the bridge financing for the TransCore acquisition. Looking at our debt interest rate profile, 53% of our debt is based on fixed rates while 47% is based on floating rates as of end 2022. We believe this is a balanced ratio, and this approach allows us to reduce interest expense volatility in both rising and falling interest rate environments.
The Group’s weighted average cost of borrowing for FY2022 was 2.4%, a marginal increase compared to 2.3% in 2021. The weighted average borrowing cost of our existing fixed rate borrowings, comprising mainly bonds, lease obligations and fixed rate loans, is around mid-2%.
We continue to work towards reducing capital employed in our Group as appropriate, undertaking measures such as net working capital optimisation, portfolio rationalisation, and asset securitisation of our Aviation Asset Management business.
In 2022, we made substantial headway in our sustainability aspirations. In our 2022 Sustainability Report, we published our inaugural Task Force on Climate-related Financial Disclosures (TCFD) report. We also expanded the proportion of sustainability metrics linked to employee performance and developed a mandatory sustainability training module for all employees. We strengthened our Supplier Code of Conduct and increased our engagement with suppliers on ESG considerations. ST Engineering has also been included as a constituent of the Dow Jones Sustainability Index Asia Pacific, representing the top 20% of the 600 largest ESG-focused companies in the region.
Read our 2022 Sustainability ReportAs well as the value delivered to shareholders, we made significant contributions to the communities where we operate. We serve our communities through a combination of volunteer work, skills-based contributions, as well as in-kind and monetary support to build an inclusive, resilient and vibrant society. We actively promote a purpose-driven giving culture through corporate initiatives and volunteerism among our employees.
We are honoured to be recipients of the National Awards (COVID-19) for our Group’s contributions to Singapore’s fight against COVID-19. The awards recognise the great teamwork and solidarity that our people demonstrated as they helped our customers and the community respond quickly to pandemic-related challenges. A special mention goes to our respiratory protection team for their tremendous efforts and ‘can do’ spirit in establishing local medical-grade surgical mask manufacturing capabilities from the ground up, helping to steer Singapore towards greater self-reliance in respiratory masks.
In 2022, we made various changes to the Board. In April, Joseph Leong Weng Keong resigned. He had been a non-independent and non-executive director since June 2019. Teo Ming Kian was appointed as deputy chairman of the Board. Kevin Kwok, who was a member of the Audit Committee (AC), assumed the role of AC chairman in place of Quek See Tiat who relinquished his AC membership. In July, Quek See Tiat was re-designated as a non-independent and non-executive director following his nine-year tenure on the Board.
The Board of Directors has proposed a final dividend of 4.0 cents per share. Together with the quarterly interim dividends of 12 cents per share paid in 2022, the total dividend for 2022 will be 16 cents per share, after consistently paying 15 cents per share even in the depths of the COVID pandemic in 2020 and 2021. This translates to a dividend yield of 4.5%, computed using the average closing share price of the last trading day of 2022 and 2021. Notwithstanding our consistent and recently increased dividend payments, we will continue to work towards strengthening long-term shareholder returns across business and economic cycles.
We remain steadfast in focusing on achieving sustainable business results, based on our well-defined growth strategy with clear mid-term revenue and profit targets. We are executing well against our strategic plan, and our track record of producing results puts us in good stead to deliver shareholder value now and in the years ahead.
ST Engineering is a Group with a vision, a clear roadmap and the wherewithal to achieve long-term sustainable growth. With the support of our shareholders, customers and employees, we will continue to shape ST Engineering into becoming a global technology, defence and engineering powerhouse.
Kwa Chong Seng
Chairman
Non-Executive Independent Director
Vincent Chong Sy Feng
Group President & CEO
Executive Director
28 February 2023
